It’s no secret that seasonality largely dictates major buying and selling trends across the real estate industry. But what about interest rates?
Interest rates are on the rise, and some think that there will be a cooling off of mortgage refinancing as a result. Here’s how that relationship has changed over the years, and how it relates to refinance trends:
Interest Rate Trends
The 2008 real estate crisis had a profound effect on the US economy. We are still seeing its after-effects, even 10 years later. As real estate values came crashing down and the rate of mortgage defaults and foreclosures spiked, the economy started to crumble. Many investors were left between a rock and a hard place – falling stock markets, rising unemployment, crashing consumer confidence, and more were spelling trouble for their investments. Generally, investors would be pushed to the safe haven of mortgage-backed securities, but those seemed to be source of the trouble to begin with.
In an attempt to revitalize the economy, the US Government cut interest rates to near zero, took over Fannie Mae and Freddie Mac, purchased over a trillion dollars worth of Mortgage-Backed Securities (MBS), and implemented other efforts over the ensuing years. This gave certain assurances to the investors that MBSs were relatively safe. With that newly introduced safety, MBSs once again became solid alternatives for investors. The high demand drove up the prices of MBSs, thus driving down mortgage rates.
As the economy recovered, housing and stock markets went into overdrive, unemployment fell, consumer confidence rose, and defaults and foreclosures normalized. Investors naturally became drawn to other interests, resulting in lower demand for MBSs and higher interest rates. As the economy continues to grow, it’s likely that mortgage rates will continue a general upward trend, possibly with a few bumps along the way.
Refinancing and Interest Rates
The increase in mortgage interest rates has been driving down refinance mortgage origination in the US. In the first quarter of 2018, the refinance volume totaled $128 billion, down from $153 billion from the prior quarter. Refinance originations were also down compared to the first quarter of 2017 ($149B). The current interest trends and mortgage origination numbers seem to spell trouble for the refinance markets.
However, there are several reasons some support refinancing in the current and expected future markets, even with increasing mortgage interest rates:
Lowering Monthly Payment. It’s common to see borrowers refinance their existing mortgages simply to lower their monthly principal payment, even if rates are on the rise. For example, taking out a 30-year loan of $417k at 3.875% in July 2003 would have a mortgage payment of $1,961. Refinancing the outstanding principal balance of the loan in June of 2018 over another 30-year period at 5.00% would lower the monthly payment to $1,435.
Refinancing ARMs to Fix the Rate. Adjustable-Rate Mortgage (ARM) loans have historically been very attractive to borrowers because they offer lower interest for the initial years. The number of applications for adjustable-rate mortgages has been steadily increasing as interest rates have been climbing. At the end of the fixed rate term, these loans are usually refinanced to another ARM or a fixed rate loan.
Refinancing to Lower Rate and Term. This seems counterintuitive – how is it possible to refinance to a lower rate when rates are increasing? The interest rate on a 10-year loan is generally lower than the rate on a 15-year loan or 30-year loan. Thus, if a loan is approaching its 14th or 19th anniversary, it may be time to consider refinancing to a 15 or 10-year loan to cover the remaining years.
Cashout. Whether to consolidate debt (lower overall monthly obligation), to invest (increase monthly income), or to improve the property, cashout is an important factor in financial planning. These loans are a significant part of refinance mortgage originations and often occur whether rates are increasing or decreasing.
Forced Refinance. In cases of impending balloon payment or the need to remove a co-borrower from a loan, refinancing may be the only option remaining. The rise or fall in interest rates may not be a consideration, as refinancing may be required immediately.
Mortgage refinances are an integral part of the US economy. The first quarter of 2018 was the slowest since the third quarter of 2014, and still, it accounted for $128 billion. The lowest in the past 13 years was in the fourth quarter of 2008, and it still totaled over $109 billion. That number should not be a surprise – there are plenty of reasons to refinance in the current market, even if the mortgage rates are trending up.
About the Author: Anatoliy Pavlishin is Head of Title & Escrow at Qualia, working with product, title, and escrow teams to ensure the platform’s compliance. Prior to joining Qualia, he was a Senior Escrow Officer and Auditor at Fidelity National Title for over 12 years. Pavlishin was named as a 2017 HousingWire Insider award winner.